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FDIC premiums up NCUSIFs steady for now

WASHINGTON (10/8/08)—The Federal Deposit Insurance Corp. (FDIC) announced a “restoration plan” Tuesday, accompanied by a proposal to increase rates banks pay for deposit insurance by seven basis points. At this time, the National Credit Union Administration (NCUA) has no similar intention. Under the FDIC plan, on average banks would pay roughly 13.5 basis points in premiums by the second quarter of next year. They currently pay 6.5 basis points. Credit unions are not facing a similar increase in share insurance premiums—at this time, according to National Credit Union Administration (NCUA) Chairman Michael Fryzel Tuesday. “As of today, everything looks fine in terms of the share insurance fund,” Fryzel said

as part of remarks during a wide-ranging interview. “And as of today I cannot tell you that there will be an increase in the premiums” federally insured credit unions pay for coverage by the National Credit Union Share Insurance Fund (NCUSIF), he added. However, he noted that based on the changes in the financial markets and other factors “everything comes into play and we will be looking at everything we need to do to make sure the fund remains strong, vibrant” and has “sufficient dollars in it to cover anything we need to.” In July, the NCUA Board reported that the NCUSIF's equity level was at 1.24%. Historically, the NCUSIF equity level fluctuates somewhat during the course of a year. Under the Federal Credit Union Act, the Board has authority to charge an insurance premium to federally insured credit unions if the Fund's equity ratio is less than 1.3%, but is not required to. If the equity ratio is below 1.2%, the Board must assess a premium to restore the ratio to 1.2%. “CUs have never cost the taxpayer a penny. We want to make sure that continues and we will do whatever we need to do to make sure the Fund remains strong and that credit unions are able to operate with that strong fund in place,” he said. When asked the earliest the issue of a premium could be raised, the chairman said: “I hope to know something by the end of this year. That is contingent upon my staff putting together all the information I have requested and everything we are working on in regards to what we need to do in the next few months to make sure everything stays—pretty good.” Meanwhile at the FDIC, that agency said its proposed changes to the assessment system include assessing higher rates to institutions with a significant reliance on secured liabilities, which generally raises the FDIC's loss in the event of failure without providing additional assessment revenue. The proposal also would assess higher rates for institutions with a significant reliance on brokered deposits but, for well-managed and well-capitalized institutions, only when accompanied by rapid asset growth. Brokered deposits combined with rapid asset growth have played a role in a number of costly failures, including some recent ones. The proposal also would provide incentives in the form of a reduction in assessment rates for institutions to hold long-term unsecured debt and, for smaller institutions, high levels of Tier 1 capital. "Like any insurance company, we've identified activities that have increased or reduced the cost of insurance, and as a result, want to factor them into our determination of assessment rates," Bair said. The FDIC Board of Directors also voted to maintain the Designated Reserve Ratio at 1.25 percent as a signal of its long term target for the fund. Comments on the proposal are due no later than 30 days after publication in the Federal Register, which is expected soon. The complete interview with NCUA Chairman Fryzel will appear in the next edition of Credit Union Magazine.